Bank of East Asia Its Only Just Begun

The Securities and Exchange Commission is planning to file a civil lawsuit against David Li, a director of Dow Jones & Co. (NYSE:DJ) David Li, chairman and chief executive of the Hong Kong-based Bank of East Asia Ltd, (BKEAF:PK) has received a Wells notice from the SEC, the final step before the agency files a lawsuit.

The SEC is troubled by the very obvious chain of contacts between David Li and Kan King Wong and Charlotte Ka On Wong Leung, a married couple, who are also defendants and are said to have made "highly profitable and highly suspicious" trades based on inside information between April 13 and April 30. Their Merrill Lynch account had never held a position in Dow Jones and had primarily held fixed income securities.

Leung's father, Michael Leung, is a Hong Kong businessman who works for the Bank of East Asia (BEA) and has close ties with Li.

The SEC must chase individuals who reside outside of the US. While David Li will be vigorously defending himself personally there appears to be a significant governance problem at Bank of East Asia.

BEA has just received approval from the China Banking Regulatory Commission ("CBRC") to establish a locally incorporated bank in China in March 2007. The new bank, named The Bank of East Asia (China) Limited ("BEA (China)"), formally commenced business on 2nd April, 2007. Within 90 days the Chairman becomes embroiled in a US based securities scandal.

The scandal will probably not have an impact on Rupert Murdoch's (NYSE:NEWS) bid for Dow Jones. Li is obviously from the Bancroft camp and it will look very odd that the defenders of journalistic freedom sponsored this guy into the house. David Li sits on both the audit and governance committee's of Dow Jones's board.

China is in a quandary. The SEC will need to subpoena documents from Chinese jurisdiction. If the Chinese refuse or otherwise frustrate the investigation and subsequent lawsuit the perception from the west will be that the Chinese protect white collar securities crime. There is enough Western doubt about Chinese practices as they relate to food and health standards, intellectual property and a wide variety of other issues. The Chinese will most likely want to look good in Western eyes. Privately they are probably not too impressed with the short term money grab that this really is.

If you want to watch the impact of Rupert Murdoch (who has big Chinese connections)on Dow Jones then watch the coverage on this story. The SEC will want to hang David Li. News Corp and Dow Jones lawyers are all shaking their heads and saying I cannot believe this crap. The Chinese will want to keep this out of the public eye as much as possible. The Wall Street Journal's Beijing bureau is supposedly in open revolt against a Murdoch takeover. But for Chinese regulatory affairs the Beijing Bureau is on deck.

Talk about the laws of unintended consequences.